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Kakao Corp Initiates Financial Audit of SM Entertainment, Signaling Potential Strains

Investigation into SM Entertainment's Investments and Management Raises Questions About Future Relations
South Korea
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Kakao Corp, the South Korean internet conglomerate, has launched a special inspection of SM Entertainment Co.’s financial reporting. This move comes less than a year after Kakao acquired the trailblazing K-pop entertainment agency, hinting at possible tensions in their relationship.

The company confirmed on Thursday that a law firm has been tasked with examining SM Entertainment’s financial statements, following a request from its board of directors’ audit committee. The audit specifically scrutinizes investments made by SM Entertainment without consultation with Kakao since its acquisition. The investigation also extends to digital forensics of devices used by key SM executives, including CEO Jang Cheol-hyuk, Chief A&R Officer Lee Sung-soo, and Executive Director/COO Tak Young-jun.

This special auditing process has reportedly met with strong resistance from SM Entertainment’s management. When Kakao took over in March last year, SM was assured of maintaining independent control. However, this latest development suggests a shift in that dynamic.

Kakao, having become SM’s largest shareholder with a 39.87% stake acquired for 1.2 trillion won ($900 million), is currently navigating through its most challenging period. The company’s CEO Hong Euntaek and other executives are under investigation for alleged stock manipulation related to the SM acquisition. Additionally, Kakao’s CFO and two senior investment managers have been arrested in connection with these allegations.

Amidst these controversies, Kakao founder and Chairman Kim Beom-soo, also known as Brian Kim, faces state scrutiny over monopoly allegations and the company’s aggressive business practices. In response to criticism over governance, Kim has re-engaged with the company’s management, signaling potential leadership changes.

The audit of SM Entertainment is perceived by some as part of Kakao’s broader business reform efforts. There is speculation that Kakao might replace SM’s current board with its own officials in the upcoming shareholders meeting in March. Amidst rumors of a potential sale of SM Entertainment, Kakao has refuted such claims, stating there are no current plans for a sale.

In a recent development, Kakao appointed Chung Shina, CEO of Kakao Ventures Corp., as its new chief executive, subject to board approval in March. This leadership change could signal a new direction for Kakao as it navigates through these complex challenges and its relationship with SM Entertainment.

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